CGS International expects Lotte Chemical Titan’s shutdown of one of its two naphtha crackers in Pasir Gudang, Johor, to benefit PetChem’s domestic market share.
PETALING JAYA: Petronas Chemicals Group Bhd
’s (PetChem) recent share price recovery is likely to have run its course, while the integrated chemicals producer may face challenges pertaining to a possible impairment of its 50%-owned Pengerang Petrochemical Company Sdn Bhd (PPC) – a joint venture with Saudi Aramco.
CGS International Securities Research said further upside to PetChem’s share price is “limited” following its recent 13% bounce after falling sharply in the run-up to the release of the company’s third quarter ended Sept 30, 2024 (3Q24) results in which there was an RM775mil net loss due to a foreign-exchange (forex) translation loss from a weaker US dollar.
Having downgraded the stock to a “hold’ from an “add” following a Nov 21, 2024 upgrading to “add” from “hold”, the research house has maintained the target price at RM5.18, following the recovery of the greenback that would lead to a forex translation gain
Meanwhile, the research house expected Lotte Chemical Titan Holding Bhd’s shutdown of one of its two naphtha crackers in Pasir Gudang, Johor to benefit PetChem’s domestic market share.
It noted that the company’s PPC joint venture faces the risk of an impairment at the 4Q24 results.
“Based on RM9bil carrying asset value, every 10% impairment on PPC will result in a 11.25 sen negative impact to PetChem’s book value per share,” it added.
Another would be PPC delivering wider earnings before interest, taxes, depreciation and amortisation (Ebitda) loss in 4Q24 compared with the RM130mil Ebitda loss in 3Q24 against the research house’s current expectations of a similar or narrower quarter-on-quarter Ebitda loss.
“The PPC achieved commercial operations date on Nov 30, 2024 and from that date onwards, PPC was supposed to be entitled to receive the special feedstock discount from Pengerang Refining Company (PRC).
“However, we understand from PetChem that the terms of the special discount are still under negotiations and the special discount is unlikely to help with PPC’s earnings performance in 4Q24,” the research house said.
CGS International said the Inland Revenue Board may also limit the extent to which PRC can transfer price feedstock at below market prices to PPC; under its transfer pricing guidelines, transfer prices should be on an arms-length basis, adding that PetChem can argue that PRC and PPC operate on an integrated basis, which justifies the sharing of the economic benefits from one entity to another.
